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A quick US trade deal won't help Britain avoid Brexit damage, economists say

Key Points
  • On a recent visit to London, U.S. national security advisor John Bolton said the U.S. would enthusiastically support a no-deal Brexit should Prime Minister Boris Johnson pursue it, adding that Washington would be ready to work fast on a free trade agreement.
  • In 2018, the EU accounted for 46% of all U.K. exports, 54% of all imports, and seven of the U.K.'s 10 largest export markets and sources of imports were from the other 27 EU nations, according to a House of Commons briefing paper published last week.
  • Senate Minority Leader Chuck Schumer on Monday vowed to oppose any post-Brexit trade deal with the U.K. that would risk Northern Ireland's peaceful status quo by reinstalling a hard southern border with the Republic of Ireland, which will remain part of the EU.

A possible trade deal with the U.S. will do little to mitigate the impact of Britain leaving the EU without a deal in place, economists have told CNBC.

Both the U.K. and U.S. governments have expressed a desire to forge a partial deal on trade as soon as possible after Britain's anticipated departure from the EU on October 31.

On a recent visit to London, U.S. national security advisor John Bolton said the U.S. would enthusiastically support a no-deal Brexit should Prime Minister Boris Johnson pursue it, adding that Washington would be ready to work fast on a free trade agreement.

However, such an accord faces significant political hurdles on both sides of the Atlantic, while also falling short of the economic reprieve Britain will need to offset the loss of its existing trade arrangements with the EU, economists have argued.

Limited impact

In 2018, the EU accounted for 46% of all U.K. exports, 54% of all imports, and seven of the U.K.'s 10 largest export markets and sources of imports were from the other 27 EU nations, according to a House of Commons briefing paper published last week.

The U.S. accounted for 19% of U.K. exports and 11% of imports, while Germany as a standalone partner represented 9% of exports and 12% of imports.

Kallum Pickering, senior economist at Berenberg, told CNBC that given the larger impact on GDP from the quantity of trade with the EU in comparison with the U.S., it is "hard to see how leaving the EU could be offset with a trade deal with the U.S."

"You could add a further layer in the fact that the U.K.'s trade agreement with the EU is free in all senses of the word, on investment, on immigration, on goods and in most services, including finance, whereas the U.K. would presumably be striking with the U.S. a trade deal that covers goods and only partial agreements in services, with very little on immigration," Pickering said.

"So the major things that the U.K. benefits from — attracting lots of FDI (foreign direct investment) from Europe, a high inflow of EU workers boosting the labor force — would not be offset by a trade deal with the U.S," he added.

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The EU has around 40 trade deals covering over 70 countries, meaning the U.K. currently has access to those markets, such as Canada, without having to pay import tariffs on most goods. In the event of a no-deal Brexit, the U.K. would lose this tariff-free access and would have to trade under World Trade Organization (WTO) rules.

In order to avoid this, the U.K. government is trying to replicate many of the EU's existing trade deals with other territories. If Brexit does happen on October 31, the U.K. will be free to sign trade deals with countries which do not have existing agreements with the EU, such as the U.S.

Britain has rolled over 13 trade deals so far, most recently with South Korea. Others have included partners with whom trade is historically negligible, such as Central America, Norway and Iceland, Israel and the Pacific Islands.

It will, however, also need to renegotiate a trade deal with the EU in order to ensure continued tariff-free access to the world's largest free-trading bloc.

While acknowledging that a trade deal with the U.S. would be advantageous in general terms, Pickering argued that the benefit of an immediate U.S. trade deal upon leaving the EU, in the case of a hard exit, "provides only a limited offset, and that's being generous."

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Other analysts were similarly skeptical about the practical aspects of a potential deal. Steen Jakobsen, chief economist at Saxo Bank, dismissed the suggestions as "political noise" when speaking to CNBC's "Squawk Box Europe" on Tuesday, citing the seven-year negotiation to establish the landmark EU-Canada deal as an example of the complexity of the process.

Altaf Kassam, EMEA head of investment strategy and research at State Street Global Advisors, pointed to the White House's recent handling of trade negotiations as an ominous sign for any prospective trade deal.

"Boris Johnson and Donald Trump have some kind of rapport, and that's a good thing, but if you see the way the U.S.-China trade negotiations have gone, it's never going to be a slam dunk for the U.K. This is going to drag on," he told CNBC earlier this week.

Political wall

The politics of the deal have emerged front and center of late. Senate Minority Leader Chuck Schumer on Monday vowed to oppose any post-Brexit trade deal with the U.K. that would risk Northern Ireland's peaceful status quo by reinstalling a hard southern border with the Republic of Ireland, which will remain part of the EU.

U.K. leader Johnson has made eradicating the Irish "backstop" the key non-negotiable in his attempt to return to the table with European leaders.

The "backstop" is seen as a way to keep the porous border between the Republic of Ireland and Northern Ireland (which is a part of the U.K.) open in the event that the U.K. and EU fail to agree a future trade deal at the end of a 21-month transition period.

Its unpopularity with pro-Brexit lawmakers stems from its requirement that the U.K. remains in a single customs territory with the EU for an indefinite amount of time.

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In a letter to U.S. Secretary of State Mike Pompeo, Schumer praised the Good Friday Agreement between the U.K. and Ireland in 1998, which created a free and demilitarized border, as a "towering achievement of diplomacy" and joined House Speaker Nancy Pelosi in vowing to block any trade deal that would threaten the agreement.

In addition to potential opposition stateside, Pickering also highlighted that Johnson would likely face similar obstacles in the U.K. House of Commons, especially in the context of Trump's "America First" agenda.

"I imagine that if the U.K. left the EU without a deal on October 31, parliament would be very skeptical of what sort of deal would be on offer from the U.S," he said.

"If the deal that the U.K. could strike with the U.S. seemed to be a little one-sided, if it was thought that the U.S. had taken advantage of the U.K. given its somewhat vulnerable position, there would be a large objection to that deal in parliament."

One step at a time

One way both parties could attempt to get around the political hurdles, Pickering suggested, would be to abandon the notion of a broad reaching bilateral trade deal signed as a single entity.

"What both parties could do and perhaps will do when it comes to it, is to say 'what areas would we like to reduce barriers in?' and then you work through them one-by-one," he said.

"You have a team assigned to each one, and when you get agreement in that area, then you pass it, so you work through the trade deal on a piecemeal basis."